One of the labels the US Federal Reserve puts on various piles of money is M-2. M-2 is the total of all money in circulation. It includes paper currency in circulation, whether held privately or in banks, added to all the coins ever minted, added to all the money in savings and checking accounts, added to all individual money market accounts under one hundred thousand dollars, and it even includes all the traveler’s checks floating around out there.
What’s important about last week’s M-2 milestone of ten trillion dollars is that it’s now twice what it was in January of 2001, and it’s now 25% higher than it was in January of 2009, on the day of the last presidential inauguration. The number is growing exponentially, meaning faster and faster. The number promises to double again in a few years.
The definition of inflation used by economists is rising amounts of money in circulation. When prices go up, the price-hikes are merely a function of inflation. It’s correct, if you like, to call it price inflation, especially when you are paying your bills. The M-2 is not to be confused with the larger number of dollars owed by taxpayers (unknown tens of trillions, thanks to a secretive Fed Reserve and a Congress of incompetent cowards) or money that is going to be owed by taxpayers in coming years (unknown hundreds of trillions) known as unfunded liabilities. And we haven’t even mentioned the one thousand, five hundred trillion dollars (1.5 quadrillion) floating around out there in derivatives.
A Short Note on Derivatives
There probably are no more than three people on Earth who claim to understand derivatives, and I’m not one of them. But I can give you an honest, clean, accurate example of derivatives. When you swipe a credit card, you create derivative wealth. You create (derive) money out of nowhere that you now owe. That money is backed by only one thing: confidence that you are good for the debt. There is nothing else backing it.
You use that derivative wealth to buy stuff and pay for things. You can later (1) pay the debt you owe with real wealth that you create from your talent or your sweat. Or (2) you can not pay it at all and just let it ride. It doesn’t matter. Someone is on the hook, and someone will pay it. Someone has already used that derivative as real money for something else somewhere else, and it’s still out there whether you pay it or not. The derivative you created has been used as collateral, or sold as an investment, or used to buy something else. It’s still used as money by someone somewhere for something. It never goes away. And it adds up.
Now just imagine all governments doing that every time they want to print, spend and waste money. Now you get the picture.
Derivatives are imaginary money, backed only by other imaginary money, which are used to create even more imaginary money, which is used by governments to buy real stuff and pay real debts, and which taxpayers always end up owing, and which taxpayers are obligated and expected to pay in real, hard-sweat, personal wealth. The confidence backing these derivative debts used as money is that governments will be able to force taxpayers to pony up. Derivatives are phantom dollars created by other phantom dollars to end up as phantom debt, which are backed only by other phantom debts, which destroy the true meaning of all wealth everywhere.
Now, perhaps you can add your name to the list of the three who claim to understand derivatives…but only if you understand that none of this madness can possibly end well.
Back to the ten trillion now in circulation.
McDonalds at one time advertised the number of hamburgers it sold as “in the millions.” They put it right up there on the sign. Then McDonalds changed that to “One Billion Sold.” Then, “Billions Sold.” After that, they stopped using the number of burgers sold on the marquee, since trillions was just not an imaginable number.
Carl Sagan, the famed astronomer and author, told us there were “billions and billions” of stars. He said that so well that I certainly believed him, even with my limited imagination. But I don’t recall him ever saying “trillions and trillions of stars.” That just didn’t seem to be a figure even the brilliant Sagan could deal with. Or, just perhaps, Carl Sagan knew his audience was not ready to deal in terms of trillions, even when counting the stars.
My point would be that the only time in history anyone has ever used the term “trillions” in polite conversation was to describe mountains of useless paper money. During the Wiemar Republic’s post-WWI devastating hyper-inflationary collapse (1921-1923), the number of Papiermarks in circulation reached into the hundreds and thousands of trillions. To give an example, one trillion Papiermarks at one time equaled one US Dollar. (Papiermarks is German for ‘paper money’, which later became Reichsmarks, then Deutschmarks, then Euros, which also happen to all mean paper money).
Germans famously used the paper bills as wallpaper, or as heating fuel for fireplaces, since it was cheaper to burn the paper money than real wood. German shoppers went to market with wheelbarrows filled with paper currency. The wheelbarrows were worth more in true value than the paper money they carried. Same goes for the devastation of the hyperinflationary flood of money in Zimbabwe just a couple of short years ago (2006-2008). In both cases, one egg or a loaf of bread carried a cost in the trillions. If you could find an egg or a loaf of bread….
I personally own a Fifty Trillion Zimbabwe Dollar Note I bought as a souvenir trinket. I paid a few bucks for it at a coin convention as a keepsake. A one-trillion Papiermark note from 1923 is a more expensive collectible than the Zimbabwe note, since it’s an historic, rare antique now. Not that many survived German fireplaces or the Allied carpet bombing of WWII. But, I guess 90 years later they were worth something after all.
The Wiemar Republic and Zimbabwe weren’t the only nations to see their currencies destroyed by money printing. The list is long. But never in history have there been so many nations on the planet going down that same destructive road at the very same time.
As Tyler Durden of Zero Hedge reminds us, this number of ten trillion US dollars in circulation reached this week is rising by one billion dollars per week. It’s just more evidence that with more money in circulation, higher prices for everything bought and sold are quickly on the way. Along with higher taxes, higher fees, higher government spending and higher government waste. Higher costs for everything. But not necessarily higher salaries and wages, since that’s between you and the boss. And that’s if the boss can even improve the business in this ever shrinking economy, or even hold onto it. http://www.zerohedge.com/news/10-trillion-m2-now-rearview-mirror
Ten trillion and rising is going to mean higher prices for everything that’s really real and that has any true value. That includes gold and silver. They are not imaginary.